I have received several inquiries recently about the rules and practices related to charitable auctions. To wrap up our discussions about Gift Acceptance Policy, I would like to provide some tips and suggestions on this topic.
Transparency regarding the deductibility of items purchased and donated at a charitable auction is key. Letting your supporters know up front the basic rules related to these transactions will prevent any hard feelings resulting from misperceptions about the process. Of course, everyone’s tax situation is different and most of us are not attorneys. Therefore, it is important to disclose that the information you are providing does not constitute legal or tax advice. Every individual should consult their own tax professional as to the deductibility of donated items and items purchased.
Deductibility for Buyers
A common misconception about charitable auctions is that any payment a buyer makes for an item is a charitable contribution to the sponsoring charity. In fact, a charitable contribution results only if the amount paid for the item exceeds its fair market value. The fact that the item was donated to the charity does not change the result. The buyers have entered into a quid pro quo transaction in which they received value for the payment they made. A quid pro quo transaction is not a charitable gift nor can it be used as a tax deduction.
Donations of Use of Property
Only the direct expenses related to the donated use of property can be deducted. Donations of use of property are considered donations of partial interest of real estate and are not tax deductible. This includes donations of use of a personal vessel as highlighted in the following example provided by www.nonprofitissues.com:
For our charity auction, a donor provided a getaway sailing weekend complete with meals, water taxi and accommodations on the sailboat. The donor also captained the boat for the trip. The trip sold for $2400. What can the donor claim as a charitable deduction?
For the donor who supplied the boat, the meals and the captaincy, the only deduction is for the out-of-pocket costs of the trip, such as food, fuel or docking fees. The captaincy and use of the boat are services that are not deductible.
Practical Suggestions for Charities
Maintaining credibility with your supporters is critical. Therefore, your FQHC should be prepared to explain the rather limited benefits of contributing to and purchasing from these events. The appropriate information should be included in solicitation for donated items and in invitations mailed to patrons announcing the event or auction.
At the time of the auction, you should have readily available information summarizing the deductibility of payments made by successful bidders. The good faith estimated fair market value of each item should be prominently displayed. Dealing fairly and openly with donors and bidders early in the process will minimize unpleasant confrontations with friends and supporters of the organization after the event.
Finally, it is important to remember that those who donate and purchase items for your FQHC’s auction are there to support your mission. Although the tax deductibility of the transaction may be important to them, supporting your mission more often than not trumps the financial benefits. Remember, they are there first and foremost to support your good work in the community, not to gain a substantial benefit.
I hope you have enjoyed this series on "The Importance of a Gift Acceptance Policy for an FQHC." In case you missed the previous posts in this series, you can check them out here:
- "The Importance of a Gift Acceptance Policy for an FQHC - Part 1 (Scope and Purpose)"
- "The Importance of a Gift Acceptance Policy for an FQHC - Part 2 (Screening Gifts)"
- "The Importance of a Gift Acceptance Policy for an FQHC - Part 3 (Real Estate Gifts)"
As always, if you have any specific questions, feel free to contact me at firstname.lastname@example.org.
Bill Franz, Senior Consultant at FQHC Associates, is a seasoned executive with over 20 years of nonprofit experience. His areas of expertise include finance, accounting, operations, information technology and strategic planning. Bill is a motivated leader who has the ability to see the long-term potential of an organization, develop creative approaches to challenges and find tactical solutions to move an organization forward both strategically and operationally.
To contact Bill, email him at BFranz@FQHC.org.